Question

Broussard Skateboard's sales are expected to increase by 20% from $7.2 million in 2016 to $8.64 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%, and the forecasted payout ratio is 65%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

Assume that an otherwise identical firm had $6 million in total assets at the end of 2016. Broussard's capital intensity ratio (A₀*/S₀) is -Select-higher thanlower thanequal toItem 2 than the otherwise identical firm; therefore, Broussard is -Select-lessmorethe sameItem 3 capital intensive - it would require -Select-a smallera largerthe sameItem 4 increase in total assets to support the increase in sales.

Answer 1

1. Computation of AFN

AFN = Increase in Assets - Increase in Liabilities - Addition to retained Earnings

AFN = $5 Million * 20% - ($450000 + $450000) * 20% - Additional Sales * Profit Margin * (1 - Payout Ratio)

AFN = $1 Million - $180000 - $1.44 Million * 7% * 35%

AFN = $1 Million - $180000 - $35280

AFN = $784720

2. Broussard's capital intensity ratio (AO*/SO) is Higher than other identical firm . therefore, Broussard is more capital intensive. it would require larger increase in total assets to support the increase in sales